When the government finally succeeded in its third attempt to remove the 30% subsidy for high-income earners holding private health insurance, the opposition’s response was a promise to restore it should the coalition be voted into office. Tony Abbott said the rebate
“is an article of faith for the Coalition. Private health insurance is in our DNA.”

He was speaking for his own party, but there was the same sentiment in the government’s defence of its initiative.

Health Minister Tanya Plibersek was at pains to point out, correctly in the view of independent analysts, that any small reduction in membership resulting from withdrawing the subsidy would be more than offset by normal membership growth and by the penalties set by the higher Medicare Levy Surcharge. Private health insurance seems now to be an article of faith for the Labor Party as well.

The changes will save the government about A$0.7 billion a year. But even after the subsidies for private health insurance are trimmed, they will still take A$3.8 billion a year out of the health budget. This subsidy dwarfs the amounts being discussed for the automobile and aluminium industries, which have rightly been the subject of public debate. There has been no such debate about the virtues of private health insurance.

The government’s modest private health insurance reforms were driven by its fiscal objectives of a 2012-13 balanced budget and its desire to wind back what many call “middle class welfare”. The reforms were certainly not about withdrawing industry assistance.

So, what is the economic justification for health insurance to be put in such a privileged position, without having to explain its raison d’etre, or to justify its subsidies?

And why have we used subsidies and penalties to encourage the private health insurance industry – a financial intermediary that costs A$2.8 billion a year – to interpose itself between health-care consumers and providers?

The US spends twice as much as other developed countries on health care but has poorer patient outcomes.Flickr/foshydog

Why subsidise the private health insurance industry?

If the function of private health insurance is to fund private hospitals, there are better ways of doing so without churning funds through the finance sector – there was a time when the Hawke Government paid a 30% subsidy direct to private hospitals.

If it’s about relieving pressure on public hospitals, it has failed abysmally. While some patient load has shifted from public to private hospitals, there has been a corresponding shift in resources from public to private hospitals. The result has been a re-shuffling of the queues for limited resources.

If the purpose of the subsidy is to compensate those who don’t draw on publicly-funded programs, it is very indirect. And it leaves unsupported those who pay for private hospital care and dental care without relying on private insurance. Contrary to partisan rhetoric, taking out private insurance does not ensure self-reliance.

If it’s to save budgetary outlays, it may do so in the short term, but in reality it simply substitutes official taxes (with their safeguards of accountability, equity and cost-control) with more opaque privatised taxes collected by health insurers.

Research shows countries that rely on private insurance to fund health care get no better health outcomes – but they spend much more than the countries that rely on the power of a single national insurer and market competition.

The stand-out example is the United States, where, as a proportion of GDP, health-care costs are almost twice the level of those in other developed countries, while by most indicators their health outcomes are worse.

If it’s to help patients choose their doctor in hospital, there are less costly ways to provide choice, particularly in cases where continuity of care is important, such as maternity services. There is little benefit in the choice of look-alike private health policies.

Support for private health insurance hasn’t alleviated pressure on the public hospital system.Jason L. Parks

A fairer health system

These shortcomings in private insurance, particularly the clumsy way it is supported in Australia, are explained in more depth in a paper John Menadue and I wrote last month and which is published by the Centre for Policy Development.

Contrary to some emotive claims, we are not calling for some form of “socialised medicine”. Private hospitals are an important part of our health services, and they should not be separated by financial barriers from public hospitals. Nor are we calling for “free” health care.

Rather, our point is that to the extent we wish share our health-care costs with one another, a strong single national insurer is the most efficient and fair means of doing so. Individual payments from those with the means to contribute, without the backing of private insurance, have an important role to play in allocating health-care resources and in relieving pressure on public budgets.

Almost a half-century has lapsed since the Commonwealth last subjected this industry to policy scrutiny, in the 1969 Nimmo Report. There was an Industry Commission Inquiry in 1996, but that was only about how to support private insurance, not whether it should be supported.

Policy makers need to ask not only whether private insurance adds value to health care – and our analysis finds it does not – but also whether it could serve a useful role under any circumstances.

Just as other sectors have had to do, the private health insurance industry should be required to show that in return for budgetary and regulatory support, it can achieve outcomes that could not be gained through other, less expensive means.